What Does Bad U.S. Credit Mean to Philadelphia?

Money manager Jeremy D. Hare gives a plain answer (or at least one we kinda understand)

Jeremy D. Hare recently brought a boutique investment firm to the area in the form of Gilford Securities’ Philadelphia branch. The University of Hartford grad has been in the financial markets since 1994 when he started at a municipal bond trading firm, but, since moving into money management, his financial expertise has spilled over into other sectors. I reached him at his office on Wednesday to talk credit downgrades, stock market turmoil, and what it all means for the city of Philadelphia.

The debt ceiling was raised, the U.S. credit rating was downgraded by Standard & Poor’s, and the stock market is in free-fall. Is this a financial apocalypse, and do I need a helmet?
Well, I think that S&P’s downgrade was mostly a political move. But, a lot of people are worried about the U.S. economy. Tuesday, the U.S. Federal Reserve said that they are going to keep interest rates at this very low level until 2013. That pretty much states that maybe the economy is not so good. The whole thing seems very reminiscent of ’08, and I think people are saying, “Whoa, let’s take a step back. I’d rather sell and know how much money I have and see what’s going to happen tomorrow.”

Is that how there are multiple waves of the falling market?
What typically happens is the small investors don’t see the news because they’re at work. They come home and see the market’s down 400 points and have $10,000 in a mutual fund so they want to sell it. So, the additional push in the market usually comes a few days later. The initial push is when the hedge funds and all those people start to manipulate the market and then the second push is when the retail investors realize they should get out and get some security in their portfolio.

On Tuesday a tweet from @Funnyordie read, “Anyone who understands/can explain problems in the stock market is probably at least partially responsible for problems in the stock market.” Is there any truth to that?
It’s partially a truthful statement. I think what’s happening is we may have a slowing down of the American economy, and we haven’t been able to create jobs. And if we can’t get Americans back to work, I think that’s the real issue—not so much about the people actually involved in the stock market.

How might current economic climate impact local companies like Toll Brothers or Comcast?
If you’re talking about a company like Toll [Brothers], they’re in building, and the housing market really hasn’t come back. It’s actually gone down from 2008. So, Toll is probably not going to go out and hire people. On the other hand, with a company like Comcast—and their acquisition of NBC Universal—they’re probably going to hire. Comcast is in that digital forefront. They’re what people are spending money on. And I think, with that situation, it’s much different—it’s a lot different than the other companies. I think Comcast realized that eventually people aren’t going to end up paying that much for cable because the prices keep coming down. But, what people are going to pay for, which is obvious from Apple, is content. And they’ve been able to acquire all that content from NBC. They were basically able to swap their stock for NBC, get a lot more content and I think that has set them up for many years to come.

Will the downgraded U.S. credit rating affect the credit rating of the city of Philadelphia?
Interest rates are staying low, so for the immediate future, in the next month or so, I don’t think there will be any kind of fallout. However, going forward, yes. If the United States is downgraded, in theory, Philadelphia would be downgraded because they get a lot of money from governments and those kinds of things. So, what’s happening is Philadelphia is having budget trouble and their pension spending is out of control and if the interest rate on what they need to borrow goes up it’s going to cost the city in a budgetary sense. That, in turn, would cost the people of Philadelphia money down the road.

Could this directly affect people who live in the city of Philadelphia?
If interest rates were to push up, the city would have to put more money toward their outstanding bond issues, which would cost the city more money. That’s why the S&P cut will eventually trickle down to the layman who’s living in the city. Let’s say it costs the city four percent to borrow money. If that goes up to six percent, that’s an extra $20,000—on every million borrowed—going toward the cost of interest. But, cities don’t borrow a million at a time. When I was at Oppenheimer we did a $391 million Philadelphia School District bond. That would cost the city an extra $7.8 million in interest costs on just that issue.

Any chance the financial market alters the city’s expectation to grow in population over the next decade or so?
I think Michael Nutter realizes that he needs to keep this city a first-class city in order to get people to want to move into the city. The first problem they’ve got to deal with is these flash-mobs because no one will want to come into the city. But, on the other hand, I drove through West Philadelphia and came back through Powelton Village on Lancaster Ave., and the resurgence in that area closer to Penn is great. The houses were [once] all vacant and it was really not a great area. Last week all I saw was building and people putting money into the area and that’s nice to see.